Unit 5. The market: Supply and Demand

IES Lluís de Requesens (Molins de Rei)Batxillerat SocialEconomics (CLIL) – Innovació en Llengües EstrangeresJordi Franch Parella

Supply and demand are the words most used by economists

Supply and demand are the forces that make market economies work

Microeconomics is about supply, demand and market equilibrium

Markets and Comptetion A market is a group of buyers and sellers of a

particular group or service The terms supply and demand refer to the

behaviour of people as they interact with one another in markets.

Markets and Competition

Buyers determine demand Sellers determine supply

Demand Quantity demanded is the amount of a good

that buyers are willing and able to purchase Law of Demand

The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises

Demand Schedule The demand schedule is a table that shows the

relationship between the price of the good and the quantity demanded

Demand Curve

Supply

Quantity supplied is the amount of a good that sellers are willing and able to sell

The law of supply states that, other things equal, the quantity supplied of a good rises

when the price of the good risesThe supply schedule is a table that shows

the relationship between the price of the good and the quantity supplied

Supply Curve

Equilibrium in the Market Equilibrium in the

market is when demand meets supply

The plan of consumers match the plans of suppliers

There is no tendency for change to occur

Market intervention

- When policymakers believe that the market price is unfair, then it results in government created price-ceiling and price-floors

- A price-floor is a legal minimum price (above the equilibrium price) at which a good can be sold.

- Price-ceiling if a legal maximum price (below the equilibrium price) at which a good can be sold

A price-floor creates surpluses(examples: minimum wage, PAC ...)

A ceiling-floor creates shortages(examples: rent controls)

Elasticity

Elasticity is a measure of how much buyers and sellers respond to changes in market conditions

Price elasticity of demand is the percentage change in quantity demanded given a percent change in price and is a measure of how much the quantity demanded of a good responds to a change in the price of that good

Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

Example of computing the price elasticity of demand

If the price of a CD falls from 1 € to 0,8 € and the quantity demanded rises from 10 Cds to 15 Cds, the price elasticity of demand is:

Elasticity = (15 – 10) / 10 : (0,8 – 1) / 1 = 2,5 The demand is elastic (greater than one), as a

change in the price of 20% causes a change in the quantity demanded of 50% (quantity demanded responds strongly to changes in price)

The demand will be inelastic (less than one) when demand does not respond strongly to changes in price

Different elasticities

Results of different elasticities

- Price elasticity of demand measures how much the quantity demanded responds to changes in the price

- If the demand is elastic, total revenue falls when the price rises and total revenue rises when the price falls

- If the demand is inelastic, total revenue rises when the price rises and total revenue falls when the price falls

Income elasticity

- Income elasticity of demand = Percentage change in quantity demanded / Percentage change in income

- Types of goods: normal goods (higher income raises the quantity demanded) and inferior goods (higher income lowers the quantity demanded)

- Necessities tend to be income inelastic (food, clothing, medical services, fuel ...)

- Luxuries tend to be income elastic (furs, sport cars, exotic foods ...)